This comprehensive guide provides a detailed checklist for startup equity, ensuring employees are well-informed about equity distribution, valuation, and the critical factors to consider.
Key Takeaways
Pre-Acceptance: Research the company, understand equity terms, and assess potential risks.
Post-Acceptance: Obtain proper documentation, file the 83(b) election if needed, and monitor vesting progress.
Diversify and Seek Advice: Assess investment portfolio, explore diversification, and consult a financial advisor for guidance.
Congratulations on your recent offer letter, and with it, the opportunity to join the exciting world of startups. Working for a startup often comes with the incredible opportunity to own equity in your company. We understand that this new adventure might leave you with a few questions, and whether you’re new to the equity game or just need a refresher, this checklist will assist you through reviewing the equity portions of your offer.
Pre-Acceptance of Offer
Research Your Company
Explore the company's background: Investigate the company's mission, history, and key stakeholders to gain a better understanding of its values and goals. Is this a company that you believe will be able to achieve a successful exit? Remember, your equity is worthless if the company goes under.
Assess the company's growth potential: Analyze the industry landscape, market conditions, and competitive landscape to evaluate the potential for future growth. This is something that you should always be thinking about while at any private company, especially if you are heavily compensated in equity.
Learn about potential exit options: Investigate whether the company plans to go public, get acquired, or pursue other exit strategies in the future. Understand the potential impact: Recognize how the chosen exit strategy may affect the liquidity and value of your equity.
Consider timing and likelihood: Assess the likelihood and timing of a potential exit event to anticipate the potential financial implications for your equity.
Review the Equity Related Terms
Determine the type of equity: Identify whether you have stock options, restricted stock units (RSUs), or another type of equity.
Determine the number of shares that you were granted: Identify the number of shares by reviewing your offer letter.
Determine what percentage of the company that number of shares equates to: To answer this, you’ll need to know the number of fully-diluted outstanding shares. You can often ask the recruiting team for this information. Your grant / fully-diluted outstanding shares = the percentage of the company that you will own if you fully vest, subject to future dilution.
Ask for the post-termination exercise period: Things are new and exciting now, but it is quite possible that you will one day leave this business. If you are granted options, you generally have a set period of time after you leave the company (either voluntarily or involuntarily) in which you must “use it or lose it” with respect to options. You must either exercise your options (i.e., pay for the stock you have the option to purchase) or have them expire worthless, which means you get none of the equity. Many companies only offer a 90 day window, and which is something you should be thinking about before you jump ship in the future. If the option price is high, you may want to put aside some cash prior to leaving the business.
Learn About Vesting
Study the vesting schedule: Review the vesting schedule provided by your company, which outlines the timeline for earning full ownership of your equity. Generally, employees will not earn ownership of any of their equity rights until their one-year employment anniversary, and then will earn.
Calculate vesting milestones: Determine the specific milestones and time periods involved in your vesting schedule. Vesting is generally time-based, but can occasionally be tied to performance. If your vesting milestones are performance-based, ensure that there are clear metrics regarding achievement of each milestone.
Post-Acceptance of Offer
Documents
Ask to be notified once your equity grant has been approved: Companies need to have their Board of Directors approve your grant. This means that there will likely be a lag between you joining the company and your grant being “official.” You should ensure that you will be notified and presented with all of the documents memorializing your equity grant.
Make sure your 83(b) election is filed: If you receive an RSA (i.e. the ability to purchase stock up front when you join the business), you have thirty days from the approval of the grant to purchase to file an 83(b) election with the IRS. More information regarding this can be filed here. While the company may handle this for you, from the perspective of the IRS, failure to file falls on you and only you. Therefore, if your company is handling the filing, make sure to follow up with them frequently to ensure that it is mailed out in time and ask for a copy.
Monitor Your Vesting Progress
Keep track of your vesting progress: Regularly monitor your vested equity and understand how much you've earned over time.
Diversify Your Investments
Assess your investment portfolio: It is likely that a large portion of your portfolio is now invested in your company. Consider diversifying your portfolio outside of your particular sector.
Explore diversification options: Research and consider diversifying your investments across different asset classes or companies to mitigate risk.